Solution to questions Assignment Example | Topics and Well Written Essays - 500 words

Solution to questions - Assignment Example This is because the z-score for 2007 was less than 1.81 while that for 2006 was more than 1.81 but less than 2.675. The calculations shows that the reasonable estimate of the nominal interest rate (nominal yield), rd, for a new issue of Aaa-rated bonds to be offered by Binghamton Truck is 6.27%. This means that the case above requires Binghamton to offer a nominal yield of 6.27% on the Aaa-rated bond to the investors. a) Why might you choose to make the investment in the 1-year security that pays an interest rate of only 6 percent, as opposed to investing in the 2-year security paying 8 percent? Provide a numerical support for your answer. In which case, I only need 3.81% interest rate to reach the savings for the 2 year investment at the end of two years. This is even a lesser rate than the original rate which was 6%. Consequently, I would have more savings when I choose the 6% interest rate. I will choose the 2- year security given the rationale that I am risk averse; in which case, 11% rate is far much more than 6. Since I am afraid of risks, I would not subject myself to a higher required rate of return which usually bears much